Showing posts from September, 2009

Have the banking weaknesses exposed by the financial crisis been adequately addressed?

I am not confident at all that we have moved to the type of regulatory environment that is necessary to prevent the next crisis. I tend to agree with the IMF assessment that our model of financial regulation was deeply flawed. Loan brokers and mortgage originators had few incentives to more realistically assess risk which, in any case, they sold on to others—this was part of the “financial innovations” so warmly welcomed by market participants. Investors relied too unthinkingly, in assessing asset quality, on unrealistic or overly optimistic analyses done by credit rating agencies, which, again, proved a time-tested ability to be lagging indicators of crises (remember the 1997 Asian financial crisis?). Regulation and supervision were too concentrated on firms and not sufficiently focused on issues of systemic risk. None of these weaknesses is being addressed in a credible way yet.

The shadow banking system—investment banks, mortgage brokers, hedge funds, among others—were lightly regul…